Viewpoint A STRONGER FUTURE - GROWING MORE DIVERSE TRUSTEE BOARDS
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Viewpoint
A STRONGER FUTURE
The official journal of the Pensions
and Lifetime Savings Association
Issue 1 2020
GROWING MORE DIVERSE
TRUSTEE BOARDS
THE OUTLOOK FOR
EMERGING MARKETS
IN 2020
STEPPING UP TO
NEW STEWARDSHIP
STANDARDS
DEMOCRACY IN THE
DIGITAL AGE
For professional clients only
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or sell any investments, products or services and should not be considered as a solicitation or as investment advice. This communication is issued in the UK by AXA
Investment Managers UK Limited, which is authorised and regulated by the Financial Conduct Authority. Registered in England and Wales No: 01431068. Registered
Office: 7 Newgate Street, London EC1A 7NX. © AXA Investment Managers 2019.
Contents C
CONTENTS
04 06 08
CEO’S VIEWPOINT JAMIE BARTLETT SUPPORTING STEWARDSHIP
DEMOCRACY IN THE NEW VOTING GUIDELINES
DIGITAL AGE
10 14 17
INVESTMENT CONFERENCE A CHANGED MEET THE BOARD:
MIND OVER MARKETS INVESTMENT CLIMATE JOHN DEMBITZ
23 25
PLSA Team:
THE PENSIONS BUSTING MYTHS ABOUT Maggie Williams, Editor
REGULATOR: DIVERSITY AND Tel: 07876 823 716
TRUSTEE DIVERSITY INCLUSION Email: maggie.j.williams@googlemail.com
Twitter: @mrsmaggiew
Edward Bogira
Tel: +44 (0)20 7601 1733
Email: edward.bogira@plsa.co.uk
31 35
Design
arc-cs ltd
www.arc-cs.com
Advertising
Adrian Messina
CLIMATE RISK COST TRANSPARENCY
Tel: +44 (0)20 7601 1722
A TRUSTEE PRIORITY INITIATIVE Email: adrian.messina@plsa.co.uk
CASE STUDIES Ben Harwood
Tel: +44 (0)20 7601 1752
Email: ben.harwood@plsa.co.uk
40 42 45
ISSN 2398-7626
© Pensions and Lifetime Savings
Association 2020. All rights reserved.
Published by the Pensions and Lifetime
Savings Association, a company registered
RETIREMENT LIVING SAVING FOR LATER LIFE GENTLE GUIDANCE: in England and Wales. Company number
STANDARDS A FUTURE STRATEGY MENTORING IN PENSIONS 1130269.
INDUSTRY RESPONSES 24 Chiswell Street London EC1Y 4TY
The views expressed in this publication are
not necessarily the views of the Pensions
and Lifetime Savings Association.
Viewpoint Issue 1 2020 3
C CEO’s Viewpoint
CEO’S Viewpoint
Julian Mund reflects on another big year for the PLSA and looks ahead to 2020.
WELCOME TO THE FIRST place and are in the early stages of
developing programmes to address
VIEWPOINT OF 2020 AND THE the issues you tell us about most
FIRST OF A DECADE IN WHICH when we go out and meet you. In
THE PLSA WILL CELEBRATE ITS the last month or so we’ve been in
Belfast, Didcot, Essex, Coventry,
CENTENARY. Shropshire, Norfolk, Edinburgh and
Now we’re into the new year, things many other places hearing what
are starting to take shape as we make matters to you.
progress on our major initiatives And of course, as Viewpoint reaches
for 2020. The biggest of these is you, we’ll be back in Edinburgh for
the new PLSA Pensions Technology this year’s Investment Conference,
Conference, which will take place on the first major milestone of the
26 November at the Hilton London PLSA year. We’re looking at Mind
Tower Bridge. There are some over Markets, considering how we
fantastic developments in tech going approach some of the biggest risks
on in our industry, and the PLSA has and opportunities for pension funds
a crucial role to play – what we call today – with a strong climate risk
our captaincy role – in bringing them theme to the event. That’s been one
together so that more of our members of Guy Opperman’s key challenges
can benefit from tech innovation recently, and the Minister will be
and we can make sure our policy back with us once again to speak
work supports tech developments. about the Pension Schemes Bill. He
The programme is coming soon but joins a fantastic line-up of speakers,
you can book your place now on and I’m very pleased that you can
our website and join people from read some of their thoughts inside.
schemes, consultancies and tech Anyone who can’t make the event can
providers who’ve already signed up sign up for live web-streaming, see
to attend. interviews with key speakers on social
Meanwhile planning for our other media and catch up on our YouTube
four conferences is underway or channel.
getting underway soon. Our Local Enjoy reading the first edition of
Authority Conference will focus on Viewpoint of 2020. And if you have
those perennial LGPS challenges such a story to tell – get in touch with our
as governance, data and investment team on viewpoint@plsa.co.uk.
that shift in nature with the evolution
of the scheme, the asset pools and
the scheme’s unique public sector
operating environment. The Annual
Conference – back in Liverpool this
year – and the Trustee Conference
in London are a little further off, but Julian Mund
we’re putting their infrastructure in Chief Executive
4 Viewpoint Issue 1 2020
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by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority.
A Article
IS DEMOCRACY SAFE IN THE
Jamie Bartlett, author and plenary speaker at this year’s
PLSA Investment Conference, sounds the alarm.
ANY SYSTEM OF GOVERNMENT NEEDS Perhaps worst of all is how democracy no longer fit for the day’s challenges. A
TO BE IN TUNE WITH THE TIME – THOSE feels out of sync with people’s expectations whimper rather than a bang.
THAT DON’T ARE DESTINED TO BE of how the world works. Democracy
Fortunately, democracy – just like artificial
OVERTHROWN, DEGENERATE, OR has barely changed since the advent of
intelligence – is multi-purpose and has
OTHERWISE FIZZLE OUT. DEMOCRACY universal suffrage, while everything else
always reinvented itself to match its time.
REMAINS, AS CHURCHILL ONCE SAID, is unrecognisable. Online is life instant,
It must do so again. Election laws must be
“THE WORST KIND OF GOVERNMENT, copiable, digitised, ranked. People expect
rewritten to ensure all digital ads follow
EXCEPT FOR ALL THE OTHERS THAT HAVE speed, convenience, personalised perfection.
the same code as their analogue equivalent.
BEEN TRIED” BUT IT INCREASINGLY FEELS Democracy can’t do that – you rarely get
Police forces need to reconsider their
DATED, INCOMPATIBLE WITH THE WAY what you want, and certainly not right away.
geographic set-up. Even the vote itself
THE WORLD WORKS. In boring old democracies things take time
should change – a single tick-in-a-box once
and are imperfect – the very things that
every five years is anaemic at a time where
All democracies depend on certain Silicon Valley has waged war on, and that
everyone reviews their restaurant, taxi, and
institutions to function. Voting is just one many people have come to expect. The result
friends’ holiday snaps.
piece of the kit. It also needs elections is frustration.
people can trust, citizens who are capable These things aren’t impossible. That
All indications suggest this incompatibility
of moral judgement, a free and fair press, a democracy is unsafe isn’t necessarily a bad
will grow. Imagine an election in 20 years
strong middle class, a functioning criminal thing, because it’s the necessary stimulus
from now, with smart fridges, 40 years of
justice system and so on. Here is the core for change. Democracy’s greatest strength,
user data and bot-generated ads. Or a hacker
problem: all of these things were created as opposed to “all the others that have been
breaking into your pacemaker. Or perfectly
in an analogue age, but now operate in a tried”, is its ability for constant reinvention
faked video footage. Are our democracies
digital one where the old rules don’t quite and renewal.
ready for this? We’ve barely come to terms
work. Examples: online drugs markets that
with the television.
the UK police can’t shut down, because
dealers are using powerful encryption; Democracy’s decline is not a matter of
millions of people’s data stolen by hackers opinion, either. Empirical studies find the
who operate openly outside our jurisdiction; world has gotten less democratic in the last Jamie Bartlett will be
wildly misleading election adverts that 20 years; and a survey released earlier this speaking at the PLSA’s
the authorities can’t seem to monitor; a year found record levels of dissatisfaction.
Investment Conference on
collapsing local press. Once you start looking The great risk to democracy is not from an
for examples of where analogue systems are arm-waving demagogue, nor from rogue Friday 13 March
struggling with digital life, you’ll find them artificial intelligence taking over. It is,
everywhere. rather, the slow and sad decline of a system
6 Viewpoint Issue 1 2020
Advertising Feature
MEETING THE CHALLENGE:
FIXED INCOME INVESTING IN 2020
With Europe characterised by negative rates and subdued bond yields,
Nick Maroutsos, Co-Manager of the Absolute Return Income strategy, explains how
the team seeks to meet the objectives of an absolute return fixed income portfolio.
Do negative rates in Europe present a challenge for Some of the large risks that we see also pertain to the credit space so
it’s not a matter of just blindly buying credit and riding the credit wave
investors?
because valuations in credit are very rich. It doesn’t mean that there’s not
There are many ways that we can stay positive in a negative interest rate value to be had there. But ultimately we believe that investors need to be
environment. The first case, I think the best case, is that we just avoid a lot more realistic about the asset that they’re buying and the value of
negative interest rate debt. To us, I think it sort of flies in the face of every the asset that they’re buying.
textbook that we’ve read. Now it doesn’t mean that negative interest rate
debt or negative-yielding debt can’t move more negative. The feeling is Are there areas that you particularly like?
that there are better opportunities that are out there, whether it’s looking One of the key sectors that we like is financials so we tend to be a large
at a variety of different sectors or a variety of different countries for owner of Australian financials as well as monopolistic type entities
investment opportunities and looking to hedge those back to the base in Singapore, Hong Kong, etc. Furthermore, we like the US financial
currencies in ways that you can still achieve positive returns in a low markets, particularly the major deposit-taking institutions or the “Too
interest rate environment. Big to Fail” type banks in the US. Some of the asset classes that we
don’t like within the credit sector are energy and autos which don’t make
Is it important to avoid a home-country bias when
up a large portion of our portfolios. We think that given the economic
investing? backdrop, particularly as the economy leads to more of a slowdown for
Our belief is that you do not need to adopt a home-country bias 2020, those assets will likely underperform over the next 12 months.
when it comes to investing in debt. I believe that there are numerous
opportunities that exist around the world whether it be in a variety of What is focusing your mind in early 2020?
different countries or sectors. So when populating or investing in a euro- One of the long-term indicators that we tend to focus on year in year out
based portfolio you don’t have to own only European assets. You can is the path of interest rates. What are central bank expectations for a year
own European issuers in other currencies or you can try to find proxies for a particular country? But also what’s priced into the market in terms of
for those assets and identify sectors that are attractive in other regions the directionality of interest rates over the course of that year? That tends
that still spin off positive income and positive yields. to be a focus because ultimately, as bond investors, we need to take a
view either for or against that in order to outperform the market. More near
How does an idea first come to you? term some of the issues that we’re looking at for 2020 centre around the
Given our open mandate ideas come more on the macro level to start US election, the trade tensions between the US and China, as well as Fed
with. We take a very long-term view of the market but then we ultimately policy because ultimately we believe that Fed policy is going to be one of
filter that down to what we expect is going to happen in markets over the things that dictates future policy for other central banks for 2020.
the next six to 12 months. It’s a function of interest rates globally. It’s a
function of central bank policy, employment and other economic data Why should investors consider absolute return income?
that ultimately leads us to where we want to be positioned on a duration In our view, the rationale for owning absolute return income over other
perspective as well as on a credit perspective. So from that point we asset classes within the fixed income landscape is very simple and that
ultimately filter down the universe to a much more micro level where is that we start with a clean sheet of paper. We are benchmark-agnostic
we are able to identify what we believe to be the best risk-adjusted meaning that we look to identify the best risk-adjusted opportunity for the
opportunities. level of risk that we’re taking. Ultimately trying to achieve a positive return
regardless of what the market is doing but still trying to maintain the
Where are you finding opportunities and risks? same key characteristics of traditional fixed income: those being capital
We are typically very optimistic about 2020 and the investment protection, income generation, low levels of volatility, and diversification.
opportunities that are around; largely because of the US Federal Reserve Similarly, absolute return income can fall within numerous buckets within
(Fed) and other central banks looking to backstop markets and provide the fixed income class. It doesn’t actually fall in one particular bucket.
the liquidity and ultimately keep the party going but also because we’re The first is that we aim to enhance cash and by accepting a modest
also faced with an environment where rates are likely to continue to move amount of more volatility we can look to achieve a higher return than
lower. So therefore we are looking for the best opportunities in countries what your investors are getting in the cash portfolios. Secondly we
where rates are going to be moving lower but also in countries and in can serve as a complement to core fixed income. Typically, core fixed
sectors where credit spreads are priced for the best return potential. And income has much longer duration than we have had historically and in
our belief is that it is in monopolistic-type entities and in Australia as well an environment where there is a lot of uncertainty around the path of
as various opportunities in the US corporate debt markets. interest rates we can serve as a risk mitigator against that core portfolio.
For promotional purposes. This article is intended solely for the use of professionals, defined as Eligible Counterparties or Professional Clients, and is not
for general public distribution.
Janus Henderson Investors is the name under which investment products and services are provided by Janus Capital International Limited (reg no. 3594615), Henderson Global Investors
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F Feature
SUPPORTING
STEWARDSHIP
As good stewardship comes under renewed focus, Caroline Escott
introduces the annual PLSA Voting Guidelines.
FOR THE AUTUMN 2019 EDITION OF Less well reported, but no less important
VIEWPOINT, WE COVERED ‘THE RISE AND for schemes and their members, is the
renewed focus on how schemes act as good
RISE OF ESG’, DISCUSSING THE PLETHORA OF
stewards of their assets. The Financial
POLICY INITIATIVES AIMED AT ENCOURAGING Reporting Council – the UK’s stewardship
TRUSTEES TO CONSIDER FINANCIALLY and corporate governance watchdog –
MATERIAL ENVIRONMENTAL, SOCIAL AND defines stewardship as “the responsible
GOVERNANCE FACTORS. allocation, management and oversight of
capital to create long-term value for clients
How schemes act as responsible investors and beneficiaries leading to sustainable
is not an issue that is going to go away benefits for the economy, the environment
now that 2020 is here. This will be the and society.” At the PLSA, we believe that
year that schemes face increased scrutiny schemes’ fiduciary duty to protect and
and pressure from policymakers and the enhance the value of individuals’ retirement
public on two related but distinct issues. savings requires them to take an active
Firstly, with British MPs declaring an role – either directly or through their asset
“environmental and climate emergency” managers – to monitor, engage and (if
and the growing prominence of groups necessary) intervene on matters affecting
such as Extinction Rebellion and activists investee companies’ long-term value.
like Greta Thunberg, investing to mitigate Although such issues could include ESG
climate change1 will be increasingly high- factors – and the best stewardship usually
profile in the run up to the UK hosting the takes place alongside a thoughtful ESG
UN’s COP26 climate change conference in approach – schemes should be willing to
November. exercise their stewardship responsibilities
on any issue of concern.
8 Viewpoint Issue 1 2020
Feature F
THE PLSA HAS PRODUCED ITS ANNUAL VOTING
GUIDELINES SINCE 2013, TO SUPPORT INVESTORS
IN CONSIDERING HOW AND ON WHAT ISSUES TO
CAST THEIR VOTE DURING COMPANY AGMS
2020 will see a whole swathe of different Guidelines. The PLSA has produced its Secondly, that even though many schemes
policy initiatives aimed at stewardship annual Voting Guidelines since 2013, to may not have their own dedicated
specifically: support investors in considering how and on stewardship resource, this does not abdicate
what issues to cast their vote during company them from their responsibility to act as
4 The second stage of the 2018 changes AGMs. This year’s document is bigger stewards nor does it mean they cannot do
to the Occupational Pension Schemes and better than ever, as we have worked anything. A key objective of our guidance is
(Investment) Regulations 2005. with members to update our guidance in to ensure schemes are better informed about
These will see new public disclosure response to policy developments to ensure what activities managers are taking on their
requirements for schemes on their that it provides practical and step-by-step behalf, and what questions and expectations
‘implementation statements’, where they help for all schemes when thinking about schemes should be setting. The entire
will have to state how they implemented stewardship, engagement and how exercising document should be used as a tool with
the policies which they set out in their their vote sits within broader considerations. which to hold not just asset managers, but
Statement of Investment Principles the also consultants and custodians, to account
previous year. The PLSA believes that there are certain
on their stewardship activities.
steps that schemes need to take if they
4 The 2019 changes to the Investment are to produce a considered and effective Our usual Voting Guidelines have also been
Regulations. These changes implemented stewardship approach. updated to reflect our views and regulatory
the European Union’s Second and market developments on key issues
Shareholder Rights Directive (SRD II) of concern – including audit, executive
and require further detail on trustee remuneration and dividend payments – and
stewardship policies to be publicly 1) Work through the scheme’s explaining how, on which resolutions and
disclosed by various deadlines in 2020 investment strategy, policy and under which circumstances investors should
and 2021. For DB schemes in particular – objectives vote. We also dig down further this year into
which had been exempt from this element key issues such as:
2) Develop and agree trustee
of the 2018 changes – this will mean they
investment beliefs
need to do so on the relevant issues. 4 How to assess a shareholder resolution on
3) Decide the role both stewardship climate change
4 The 2020 Stewardship Code. The Code is and the integration of ESG factors
a voluntary comply-or-explain initiative play within this framework 4 The implications of securities lending on a
run by the FRC and “aims to enhance the scheme’s portfolio
4) Consider what constitutes an
quality of engagement between investors appropriate engagement strategy
and companies to help improve long-term
4 The importance of using a vote to hold
and plan directors individually accountable
risk-adjusted returns to shareholders.”
Since 2010, all UK-authorised asset 5) Formulate an approach or policy
4 The issues around voting in pooled funds.
managers must produce a statement of for voting decisions
commitment to the UK Stewardship Code 6) Communicate expectations to Being a good steward is an intrinsic
or explain why it is not appropriate for service providers part of being a responsible investor and
them to do so. The Code was updated in fundamental to fulfilling schemes’ fiduciary
7) Monitor and hold asset managers
2020 to include explicit references to ESG duties to members. We hope that our new
to account
factors, a shift towards more outcome- annual Stewardship Guide and Voting
focused reporting, a new set of Principles Guidelines will support schemes of all
for service providers and a broader focus shapes, sizes and types in doing so.
on good stewardship beyond equities.
INCREASED STEWARDSHIP SUPPORT
Our guidance covers the issues above in THE ENTIRE DOCUMENT
much more detail, but a few things are worth
emphasising. Firstly, that a key way to put
SHOULD BE USED AS A TOOL
Although the PLSA has always provided
stewardship into practice is engagement – by WITH WHICH TO HOLD NOT
significant practical support to schemes on
stewardship – with a particular emphasis on
which we mean purposeful dialogue with JUST ASSET MANAGERS, BUT
how they ensure asset managers, consultants
investee companies – and not just voting. ALSO CONSULTANTS AND
and custodians are undertaking stewardship
Engagement can take a number of different
forms, from working with other investors or
CUSTODIANS, TO ACCOUNT
on their behalf – we will be stepping up our
bodies, to direct meetings with companies, or
ON THEIR STEWARDSHIP
support this year.
from adding your voice to a collective letter, ACTIVITIES
One of the most popular strands of our to lobbying policymakers on key issues.
stewardship support is the recently published Schemes should consider how best they can
annual Stewardship Guide and Voting use all the stewardship tools at their disposal. 1. Explored in this edition of Viewpoint
Viewpoint Issue 1 2020 9
A Article
PLSA INVESTMENT CONFERENCE
2020: MIND OVER MARKETS
Rachel Pine looks forward to a diverse
and compelling event in Edinburgh.
WHAT DO AMERICAN RAPPER Investment Conference 2020,
SNOOP DOGG, BRITISH titled ‘Mind over markets’, looks
to empower the voices around
JOURNALIST AND NOVELIST
the trustee and management
RUDYARD KIPLING AND THE UK’S tables of the UK’s schemes to
PENSIONS INDUSTRY HAVE IN meet coming opportunities and
COMMON? NOT ALL THAT MUCH, challenges head on, including
ACTUALLY, BUT IN BUILDING new legislation included in the
THIS YEAR’S INVESTMENT Pension Schemes Bill, potential
CONFERENCE PROGRAMME, changes arising from the
2020 Budget and new, stricter
WE FOUND OURSELVES TAKING
guidelines that will result in
INSPIRATION FROM A WIDE schemes having to model their
RANGE OF SOURCES. portfolios to reflect future
climate scenarios.
In mid-2019, with the world
experiencing a good amount of Clearly our industry has much to
geopolitical upheaval, interest consider, which is why we built
a programme that pulls together We have new streams this year: reporting to the role of gold in a
rates on life support and
commentary that looks not just as well as our hugely popular pension portfolio.
various recession indicators
at the UK, but at economies DB and DC Investing streams,
flirting with their red zones, we As signatories to HMT’s
around the world, with speakers we’ve added Global Markets and
looked over the many topics Women in Finance Charter, we
from not just the pensions Climate streams – both geared
we hoped to cover at IV20. It endeavour to even up the gender
industry, but from technology, to helping schemes understand
became clear that no matter balance on our programme, and
government, central banking and new areas of potential risk and
which subjects and speakers the this year we’ve gone one step
journalism, among other fields. reward.
conference programme would further, with a speaker cohort
eventually include, trustees Over the three days we’re In response to requests from that is perhaps more diverse than
would need to have the courage bringing lots of content to help our members, who let us know we’ve ever presented in the past,
of their convictions to steer their attendees keep their ‘mind over they wanted more time and in terms of experience as well
schemes toward the best possible markets’ – noted economist opportunity for peer networking, as characteristics. We’ll also be
outcome. They would need to Gerard Lyons who’ll speak on we’ve added a new type of looking at diversity in a special
believe in their own decision- the UK’s evolving economy, session to the programme – plenary session that starts with
making capabilities, as well as Guy Opperman, our Pensions Discussions in the Round, Baroness Sayeeda Warsi talking
those of the decision-makers Minister, who’ll discuss the which are participatory, small about her own experience of
they employ to give advice, and Pension Schemes Bill, the group discussions on a variety being a first, and in many cases
those who invest on their behalf. Budget and his new emphasis on of topics from the materiality of an only woman/Asian/Muslim/
To be confident, while being climate, and noted technology ESG to fiduciary management, young person in various roles,
aware of all the potential risks big thinker Jamie Bartlett, who’ll operational governance and and continues with a panel
and pitfalls. As Kipling wrote in show us how the dark net may be more. Look for these in the new, of industry leaders debating
his immortal poem ‘If’: threatening our very democracy. extended afternoon breaks on if any one area of diversity is
Wednesday and Thursday. more important to promote
‘If you can keep your head We’ve even gone as far as a than others – it’s sure to be a
when all about you Nevada brothel for this year’s And, as so many of you told us
contentious session that will be
programme, with economist you wanted to have even more
Are losing theirs and utterly compelling to watch.
and retirement expert content, we’ve changed up our
blaming it on you’.
Allison Schrager, author of famous fishbowl – the Learning We hope that Investment
This line of thinking also brought An Economist Walks Into a Hub – to include ‘Lightning Conference 2020 will leave
to mind Snoop Dogg’s perhaps Brothel, a book that describes Rounds’, short sessions that you with lots to think about,
more mortal, but no less apropos how various non-financial explain specific investment lots to discuss with colleagues
line, “With my mind on my sectors evaluate their own risks, themes, from portfolio and peers, and above all, an
money and my money on my including racehorse breeders, robustness to a workshop on understanding of how to keep
mind”. restaurants and big wave surfers. climate measurement and your mind over markets.
10 Viewpoint Issue 1 2020The Governance Gap
Nick Horsfall,
What might trustees and advisors be missing? Managing Director, AMX
Good governance of a pension scheme is important. A good starting 3. Effective treasury management. Excess cash in a portfolio may
point for looking at governance is the framework offered by The often be left in a custody account, garnering little or no interest.
Pensions Regulator (TPR) which states that good governance requires By using an efficient automated cash management strategy,
trustees to set up a process to identify, evaluate and manage risks on an trustees can ensure that assets held within portfolios are
ongoing basis. By establishing and operating adequate internal controls, maximising financial returns for scheme members, resulting
trustees are able to manage the risks associated with their scheme. in a 0.10%–0.20% p.a. increase in return for some funds.*
In essence, good governance means that trustees are aware of the 4. Cost and tax management. Managing costs and reclaiming tax
hazards associated with a pension scheme and take actions to is clearly important. However, these steps are not always taken,
reduce those risks in line with TPR’s best-practice framework. leading to a drag on returns. For example, despite the UK/USA
joint tax treaty, US fund managers using OEIC and SICAV structures
Managers, trustees and pension scheme advisors have to manage
can be subject to tax of 30% on returns paid out in dividends.
multiple demands and guard against a range of risks cited by TPR.
Using tax transparent fund structures like Irish-domiciled Common
Yet hazards under the category of operational procedures and
Contractual Funds (CCFs), allows for ‘looking through’ the tax
technical systems can contain ‘hidden risks’ which are often
status of investors, in order to maximise the value of tax treaties
neglected, creating what we describe as ‘the governance gap’.
and minimise costs.
Below are five key areas where AMX believe that improving
5. Working with counterparties. Managing counterparty risk is
operational capabilities can avoid hazards and support good
vital because some of a fund’s assets can be held in the accounts
pension scheme governance:
of third parties. If these entities go into administration, such assets
1. Mitigating trade errors. Errors made while buying and selling can be extremely hard to reclaim. Each counterparty should be
assets can reduce investment returns and cost investors significant robust. They need to have a strong credit score, be fit-for-purpose
amounts over time. A standardised process, formally set out with and have good process management.
portfolio managers, can be valuable in spotting trade errors early.
When a scheme is well-governed, it mitigates risk more effectively
2. Fund liquidity management. As many as four in ten European and is agile enough to take advantage of opportunities. But good
high-yield bond funds would not have enough liquid assets governance cannot take a ‘one-size-fits-all’ approach – it is not a set-
immediately available to meet investor withdrawals in the event and-forget exercise, but rather a frequently evolving paradigm. Funds
of a market shock, according to the European Securities and must monitor the emergence of new risks in order to develop the robust
Markets Authority. Ongoing monitoring of fund liquidity is vital to operational infrastructure and independent risk oversight to properly
ensure that the liquidity of underlying assets matches that of the manage them. Because ultimately, good management of risk in pension
fund and its redemption terms. schemes greatly improves the likelihood of providing savers with
a good retirement.
*Source AMX
Five key areas
where operational
capability can
support scheme 1 2 3 4 5
governance:
Mitigating Fund liquidity Cost and tax Working with
trade errors management management management counterparties
If you would like to discuss any of the issues raised in this synopsis or read the full report, please contact us using the details below.
Email: clients@theAmx.com | Website: https://theAMX.com/Governance
The Asset Management Exchange and AMX are trading names of The Asset Management Exchange (Ireland) Limited, The Asset Management Exchange (UK) Limited and The Asset
Management Exchange (IP Co.) Limited.Article A
THE
BIG
SHIFT
Experts from the PLSA’s
Investment Conference
panel discuss the implications
for trustees of a potential
move from RPI to CPIH.
THE OFFICE FOR Q
NATIONAL STATISTICS WHAT ACTIONS SHOULD BE ON EVERY TRUSTEE BOARD’S TO-DO LIST
WHEN PREPARING FOR THE POTENTIAL SHIFT FROM RPI TO CPIH?
(ONS) HAS SAID THAT
IT WANTS TO PHASE A A
Every trustee should understand the The topic of RPI reform is an extremely
OUT THE RPI FORMULAE implications of any shift for their scheme complex matter with positive and negative
AND USE CPIH INSTEAD, especially those with CPI-linked liabilities, outcomes
and for their members. For some schemes – for different pensions schemes.
Before making any change I strongly advise
NO LATER THAN 2030. forced by necessity to hedge with RPI-
linked assets – the impact of the current
trustee boards to ensure that they have
conducted appropriate scenario analysis
ALTHOUGH DETAILS AND be very negative. In other cases it would be tofunding
proposal, to align the RPI with CPIH, could understand how their pension scheme’s
level and deficit would be impacted
TIMESCALES ARE STILL members’ benefits that will be impacted (e.g.
a fall in transfer values, cash lump sums,
along with any risks introduced by making
changes to their hedging strategy. Once
IN FLUX, THE POTENTIAL future pension increases). We have published considered, I encourage trustee boards to
information on the proposals and their respond to the RPI reform consultation due
MOVE COULD HAVE A potential implications at www.rpireform. to be issued in March 2020.
SIGNIFICANT IMPACT ON for those considering what to do.
com, and hope this will be a useful resource
Paras Shah
PENSION SCHEMES. We would encourage every trustee board Head of Liability Driven Investment,
Cardano
to consider responding to the government
consultation on the changes. Given the likely
negative effects, we believe it is preferable to
avoid creating winners and losers by aligning
the RPI with CPIH plus a margin.
Jos Vermeulen
Head of Solutions Design, Client Solutions
Group, Insight Investments
Viewpoint Issue 1 2020 13A Article
A CHANGED INVESTMENT
CLIMATE
Pensions Minister Guy Opperman explains why the climate
crisis should be the number one issue for every scheme.
AS THE SECOND LONGEST SERVING POST- I realise the TCFD recommendations are When the Bill completes its passage, we will
WAR MINISTER FOR PENSIONS I HAVE unfamiliar to many and can be daunting formally consult on how we move towards
to apply to pension schemes. That’s why mandatory TCFD reporting for large
NOW STEERED A NUMBER OF POLICIES
my officials and I have been delighted pension schemes. I will use the evidence
FROM RECOMMENDATION THROUGH TO to support Stuart O’Brien of Sackers, to assess what schemes also need from
LEGISLATION. ONE OF MY PROUDEST and others on the Pensions Climate Risk asset managers and insurers as we need
ACHIEVEMENTS IN POST IS TO INTRODUCE Industry Group (see page 31), developing disclosures along the whole length of the
NEW POLICIES THAT TACKLE THE GREATEST the first pension scheme-specific guidance. chain.
CHALLENGE TO OUR FUTURE – CLIMATE This will be launched on Thursday 12 March
Climate change is a risk more profound and
at the PLSA Investment Conference. Stuart
From the Law Commission’s report in June far-reaching to pension savers’ finances
and his team have done excellent work in
2017 to the introduction of new regulations than the more immediate concerns of
integrating TCFD into the trustee decision-
in October 2019, my officials and I have interest rates, inflation, individual company
making process and ensuring it is relevant
worked at pace to deliver a sea change in the performance or the market cycle. The very
for governance bodies.
way that pension schemes consider ESG and fact that it is not a cyclical risk, and that we
– especially – climate risk. Building on this, are well into unknown territory without a
we recently amended the Pension Schemes map, does not give us permission to ignore it.
Bill, taking powers to require schemes to We all know the tools to manage climate
report in line with the recommendations risk, and we should embrace the
of the Taskforce on Climate-related opportunities of the low-carbon
Financial Disclosures. transition.
Working with pension schemes, I would like to thank the PLSA,
civil society and organisations like Stuart, and everyone else who has
the PLSA, we can take control of helped to deliver the Pensions
our response to climate change Climate Risk Industry Group
and change our future. guidance. I encourage you to
But government cannot do respond to that consultation.
this alone. Our amendments And if you go, I hope you
to the Pension Schemes Bill have a very enjoyable and
are a clear steer that this is enlightening conference.
everyone’s problem. We need to
make sure that every financial
decision takes climate change
into account. That means all of us.
No pension scheme is too small to
make a difference.
I appreciate the new provisions in
the Bill have caused consternation in
some quarters, but that is unwarranted.
The legislation places duties on trustees
to review and assess the exposure of the
scheme to climate change, and to determine
investment strategies and targets. It does WE ALL KNOW THE TOOLS TO MANAGE CLIMATE
not give government a power to determine
investment strategies or targets. These will RISK, AND WE SHOULD EMBRACE THE OPPORTUNITIES
remain matters for trustees alone. OF THE LOW-CARBON TRANSITION
14 Viewpoint Issue 1 2020Feature F
ESG IS IN EVERY
STEP WE TAKE
In every investment we make. In every view we take. ESG
factors are integral to everything we do. Why? Because we
believe they can impact your investment outcomes.
To learn more search: Franklin ESG.
For Professional Investor Use Only. Not for Distribution to Retail Investors.
The value of investments and any income received from them can go down as well as up, and you may get back less than you invested.
Past performance is not a guide to future performance.
Issued by Franklin Templeton Investment Management Limited, Cannon Place, 78 Cannon Street, London EC4N 6HL. Authorised and regulated by
the Financial Conduct Authority.
© 2020 Franklin Templeton. All rights reserved. Viewpoint Issue 3 2019 15THE MEMBER
BACKING
PENSIONS AND
LIFETIME SAVINGS
ASSOCIATION
TRUSTEE TRAINING
PROGRAMME
LEARN THE THEORY AND
PRACTICE OF BEING A PENSION
SCHEME TRUSTEE ON OUR
POPULAR COURSES.
100% OF
DELEGATES WOULD
RECOMMEND THE
COURSES TO A
The most important ingredient of COLLEAGUE
good pension scheme governance is
the people who provide it: pension
scheme trustees. They play an
important, complex and rewarding
role in delivering good outcomes for
scheme members.
Our trustee training programme
PART 1 - THE THEORY
5 May | 22 Sept | 7 Oct | 4 Nov
helps new trustees, people interested
in becoming a trustee, and more PART 2 - THE PRACTICE
experienced trustees to understand 25 Mar | 10 June | 22 Oct | 17 Nov
their role and responsibilities and the PART 3 - THE EXPERT
issues they’ll deal with. 14 May | 24 Sept | 1 Dec
For more information please visit
www.plsa.co.ukArticle A
MEET THE BOARD:
JOHN DEMBITZ
Maggie Williams talks to experienced NED and business
consultant John Dembitz about his work on the PLSA board.
Q
Q but I then rapidly said “Hang
on a moment, I think this could
pensions. Change is being driven
by technology (especially related
COULD YOU TELL ME A be really interesting given the to the dashboard), legislation
LITTLE ABOUT YOUR CAREER magnitude of changes taking (related to tax, freedom of
TO DATE, AND HOW YOU place. So, yes, but with whom?” choice, and DC) and competition
STARTED WORKING WITH THE (multi-trusts, funds and IFAs).
To be frank I had never heard of
PLSA AS A NED? the NAPF (National Association
of Pension Funds – prior to Q
A rebranding as the PLSA), but
why would I have? The NAPF
WHAT DO YOU ENJOY ABOUT
My career divides into three
was looking for someone
WORKING WITH THE PLSA
distinct stages: professional,
from outside the sector, with accessible, easy to understand AND THE PENSIONS SECTOR?
entrepreneurial and plural. and all-encompassing. Thirdly,
good NED experience and
The first of these (professional)
commenced with McKinsey the
some ‘relevant’ professional simplicity and clarity of
communication as to what
A
background. I seemed to tick Just about everything! The
global management consultancy, is going on within pensions
most of the boxes, and was board is very inclusive, and
progressed to a FTSE 100, then and how it is impacting on
invited to join the board as the open dialogue and debate is
a merchant bank, and in 1985 everyone’s lives is essential.
first selected NED from outside encouraged and welcomed. I
to being appointed as CEO
the sector. I have argued for some time that value hugely the interaction not
of a corporate and financial
communications consultancy. we need a pensions equivalent only with my board colleagues
My entrepreneurial career
Q of the ‘Tell Sid’ advertising
campaign, launched to get the
but with PLSA staff as well.
I have never been made to
started just after the collapse AS A VERY EXPERIENCED UK population engaged with feel like an outsider, quite
of the Berlin Wall. My brother NED WITH WIDE-RANGING the privatisation of previously the opposite, my non-sector
and I joined forces and created BUSINESS EXPERIENCE, nationalised industries in experience has been welcomed
our own business that morphed WHAT DO YOU THINK ARE THE the 1980s, which was hugely as is evidenced by the fact that
into an IT consultancy focused MAIN CHALLENGES FOR THE successful! We need to another independent director
on Central and Eastern Europe. PENSIONS INDUSTRY? communicate with the general has been appointed.
We grew this from zero to 350 public much more effectively
people and $40 million of
revenue in four years and sold it
A about possibly the most critical I value the opportunity to
partake in the key conferences
The sector is going through huge financial decision of their lives:
to Deloitte. how they will be able to afford – something the PLSA excels in,
change. From my perspective, always fascinating and always of
In 1998 I gave myself six the industry has three key their retirement and especially
how they will be able to afford real value. It’s a privilege to be
months to establish a number challenges. Firstly, the shift to involved with what is, without
of advisory/non-executive roles DC and the implications for care in retirement.
doubt, a highly professional
with SMEs, which heralded the (a) the service providers such organisation that punches way
beginning of my plural career.
It happened much faster than
as multi-trust, IFAs and fund
managers; (b) the pensioner/
Q above its weight.
I had anticipated – that was 22 beneficiaries and their decision- ARE THESE CHALLENGES
A
years ago and I’ve loved virtually making; and (c) government MIRRORED IN OTHER
every day! regulation in respect of tax/ INDUSTRY SECTORS?
freedom of choice/retirement
Five years ago, I received a
call from a head-hunter asking
adequacy et al. A
whether I’d be interested in a The second challenge is Only to some degree. Yes change
Non-Executive Directorship the establishment and is impacting all sectors, but not
(NED) in the pensions sector? implementation of a pensions quite to the same degree as what
My knee-jerk reaction was ‘no’, dashboard that is readily is currently happening within
Viewpoint Issue 1 2020 17Pictet-Global Environmental Opportunities is a compartment of the Luxembourg SICAV Pictet. The latest version of the fund’s prospectus, KIID (Key Investor Information Document), regulations, annual and
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EMERGING MARKETS
– OUTLOOK FOR 2020
Charlotte Moore considers how the coronavirus and other
factors may affect emerging markets in the year to come.
WHILE THERE ARE MANY Bokor-Ingram adds: “Emerging coronavirus. Bokor-Ingram says: BEYOND CORONAVIRUS
REASONS TO BE CHEERFUL market currencies were weak “Companies still have to make
Once the impact of the
over the last three to four years, their interest payments even if
ABOUT THE OUTLOOK FOR BOTH coronavirus fades, however,
which has reduced currency profitability slumps.”
EMERGING MARKET DEBT AND the fundamental invest case
risk.”
EQUITY, INVESTORS WILL NEED If companies have a cash flow for emerging markets will re-
TO SEE WHETHER THE IMPACT OF The pandemic is, however, crunch and are unable to make emerge.
proving economically disruptive. their debt repayments, they’re
THE CORONAVIRUS IS CONFINED The outlook for the two asset
It’s also hard to predict the at risk of not being around to
TO THE START OF THE YEAR OR classes – equities and debt –
impact it will have on the benefit from the post-virus
WHETHER ITS EFFECTS LAST differs. It will be shaped by
emerging markets as we don’t recovery.
LONGER. how each performed last year,
know how long it will last.
Should the impact of coronavirus the impact of the economic
Andrey Kuznetsov, senior Rupert Watson, head of asset last long enough, companies environment and the relative
portfolio manager at Federated allocation at Mercer, says: “Over could be unable to make their value of each asset class to
Hermes, says: “Before the short term, coronavirus will debt repayments and could go developed markets.
coronavirus emerged, the slow growth and be negative for bust, adds Bokor-Ingram.
outlook for 2020 was positive Last year was a particularly
the Chinese economy and other
for emerging corporate credit But the corporate credit markets strong year for emerging
emerging market economies.”
markets.” should be better able to shrug corporate debt markets. Tapan
Certain sectors will bear the off any short-term downturn Datta, head of asset allocation
Dominic Bokor-Ingram, chief brunt of the impact, such caused by the coronavirus as at Aon, says: “This was driven
investment officer at i Capital, as retail, hospitality and most are investment grade and by the fall in US Treasury yields
agrees: “On 1 January, things entertainment. Bokor-Ingram have strong balance sheets, says and the chain of rate cuts at
were looking upbeat for these says: “Any business which relies Kuznetsov. emerging market central banks.”
asset classes.” on significant numbers of people
At the moment, most investors Not only did the US Federal
being at a particular location will
A number of factors contributed think the impact of the Reserve cut the cost of borrowing
be affected.”
to that optimistic assessment. pandemic will be most acute three times last year but around
Kuznetsov says: “Economic In theory, the impact could be during the first three months of 60 emerging market central
growth looked positive and the felt in both corporate debt and the year and then start to fade, banks also cut interest rates.
low number of local elections equity markets as a dramatic fall with growth recovering as the
meant political risk in economic output could affect year progresses.
is constrained.” a company’s profitability and
Watson says: “The big question
financial health.
is whether the slowdown caused
Companies with high levels by coronavirus is confined to the
of debt are more likely to be first quarter of the year or if it
negatively impacted by the lasts for longer.”
economic downturn of the
Viewpoint Issue 1 2020 19F Feature
Datta says: “This was an even should also benefit equities as it
stronger spree of rate cutting will provide economic stimulus.
than after the global financial
Manufacturing should also
crisis.” Almost three-quarters
improve in 2020 after a THE BENEFIT OF INVESTING IN EMERGING
of the world’s leading developed
moderate inventory cycle MARKETS FOR PENSION SCHEMES
and emerging market central
when stocks were run down.
banks cut rates last year, he While the outlook for emerging markets may be
Watson says: “Consumption
adds. This created a significant positive – once the threat from the coronavirus has
has remained strong which
tail wind for emerging market subsided – pension schemes will only invest in this
will provide the incentive for
debt corporate credit as asset class if it matches their investment goals.
manufacturing to pick up once
investors chased the pickup in
again.” Those targets vary whether it is a closed private sector
yield in emerging market debt.
defined benefit (DB) pension scheme, an open LGPS
Emerging market equities
Datta says: “Both dollar- fund or a defined contribution (DC) scheme. The latter
also look good value. Actively
denominated and local currency two have more similar targets than the former.
managed global equity funds
debt benefit because interest
currently have one of the most A closed DB scheme is trying to generate sufficient
rates were cut in both the US
significant underweighting to growth to narrow its funding gap while not adding too
and the emerging markets.”
this region since 2008, says much risk. As LGPS funds are open and DC schemes
In 2020, however, the impact of Bokor-Ingram. have no specific benefit payments to match, they can
interest rate cuts will be more afford a more relaxed attitude to risk.
muted for dollar-denominated “EM equities are also more
undervalued relative to As a result, emerging market corporate debt is a better
debt as the US Federal Reserve
developed markets than they match for closed DB schemes as these assets are less
is unlikely to cut further. Some
have been for a decade,” he risky than equity. That’s partly because bonds are
emerging market central banks
adds. always less risky than equities, and also most EM
are, however, still cutting rates,
corporate bonds tend to be investment grade.
such as India and Russia. The outlook for corporate
profitability and cash flow Unlike other asset classes, where the number of
Datta says: “This should
generation looks strong. investors outweighs the potential supply, the number
provide further support to local
Over the last five years, many of corporate credit investments is increasing as new
currency emerging market debt
emerging market companies countries and companies start to issue more bonds.
but it will depend on how these
currencies perform relative to have improved the strength of Datta says: “This increase in supply allows investors to
the US dollar.” their balance sheets, reducing diversify as well ensuring better returns for investors
their debt and starting to pay though they will remain riskier than developed market
In historical terms, the better dividends, says Bokor- equivalents.”
greenback is looking expensive Ingram.
relatively to virtually every The increase in the number of issues from this region
other currency. Datta says: “As The negative impact of the trade of the world makes it hard for investors to ignore this
the Federal Reserve is unlikely wars should lessen in 2020. asset class. Kuznetsov says: “Not investing in EMD
to raise rates, there is no There is likely to be a pause would be to ignore a growing proportion of the credit
reason to expect the dollar to in the current trade wars as universe.”
strengthen further.” President Trump is unlikely to
upset the apple cart during an While closed private sector schemes would be more
As a result, local currency election year, says Watson. interested in emerging-market debt, emerging-market
emerging market debt should equities could be part of the portfolio for both LGPS
perform relatively well in 2020 There is always a chance the and DC schemes.
and could outperform dollar- US elections could affect the
denominated fixed income performance of emerging Bokor-Ingram says: “An allocation to emerging market
if emerging market rate cuts markets later this year. equities gives investors the ability to translate excess
continue and currencies hold Kuznetsov says: “Political growth into excess earnings and greater returns than
their own against the dollar, he uncertainty in the world’s developed markets.”
adds. largest economy has the ability Until recently, emerging markets have lagged the US’
to impact all other markets.” ability to generate higher returns. Earnings growth in
In addition, the European
Central Bank’s continued Volatility could start with the that market has been higher in the last three or four
corporate bond programme will Democratic primaries and years because of share buybacks and higher dividends.
suppress yields in this market, reach a peak in November. Bokor-Ingram says: “These factors have masked
continuing to make returns in Kuznetsov says: “The elections the higher underlying corporate earnings growth of
emerging credit markets look are unlikely, however, to emerging markets.” But now the number of US buy-
attractive, says Kuznetsov. The derail emerging market backs is falling, emerging market growth will outstrip
bids from the ECB also lower performance.” the US.
volatility in European credit
That’s because Trump looks
markets which allows asset
likely to win, there should be
allocators to take more risk
better year-on-year growth and
in other asset classes, such as
a tailwind of monetary policy
emerging market credit, he adds.
stimulus from last year. All
Last year’s rate cutting spree by these factors should support
emerging market central banks emerging markets, he adds.
20 Viewpoint Issue 1 2020You can also read
